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Railway  Accounting 
Under  Federal  Requirements 


BY  FRANK   NAY 
Comptroller,  Rock  Island  Lines 


A  paper  read  before  the  Western  Railway  Club 
Chicago,  January  15,  1917 


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PUBLISHED  BY  THE  EXECUTIVE  COMMITTEE 

ASSOCIATION  OF  AMERICAN  RAIL^VAY  ACCOUNTING  OFFICERS 

ni6  AND  U18  ■WOODWARD  BUILDING 

WASHINGTON,  D.  C. 


Q-. 


Railway  Accounting 
Under  Federal  Requirements 


Railway  accounting  consists  in  the  combining,  assembling  and 
classifying  of  the  hundreds  of  thousands  of  transactions  of  a 
railway  company  monthly,  into  a  condensed  statement  which 
shall  exhibit  to  the  executive  officers  of  the  railway  and  to  others 
interested  the  assets  and  liabilities  of  the  company,  and  the  in- 
come account.  In  theory,  the  matter  is  quite  simple,  but  in 
practice  it  is  complicated  because  of  the  large  volume  of  trans- 
actions and  the  diversified  character  of  the  transactions.  On 
one  railroad,  which  is  probably  a  fair  sample  of  the  larger  rail- 
roads of  the  country,  this  data  must  be  gathered  from  1,500 
foremen  of  section  gangs  and  extra  gangs,  more  than  1,000  sta- 
tion agents  for  both  freight  and  passenger  traffic,  more  than 
1,000  conductors  of  freight  and  passenger  trains,  hundreds  of 
foremen  of  shop  gangs,  bridge  gangs,  building  gangs,  telegraph 
line  repair  gangs ;  in  fact,  it  will  cause  but  a  moment's  reflection 
by  you  men  of  experience  to  realize  the  vast  multitude  of  items 
that  must  be  classified  and  gathered  from  all  parts  of  a  railroad 
into  one  simple  statement  which  will  reflect  the  financial  condi- 
tion of  the  company,  and  the  result  of  its  operation.  However 
numerous  these  items  may  be,  they  affect  but  three  general  di- 
visions of  the  accounts;  viz.,  assets,  liabilities,  and  the  income 
account.  The  balance  of  income  is  finally  carried  to  the  bal- 
ance sheet  which  exhibits  the  assets  on  one  side  and  the  liabil- 
ities on  the  other.  Therefore,  when  an  item  comes  before  us 
for  classification,  we  consciously  or  unconsciously  classify  it 
as  affecting  an  asset,  a  liability,  or  the  income  account.  Of 
course,  we  have  a  variety  of  details  in  the  classification  of  the 


401776 


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2  Railway  Accounting  Under  Federal  Requirements 

assets,  also  of  the  liabilities  and  the  income  account.  After  it 
is  assigned  to  one  of  the  three  general  divisions,  it  then  must 
be  assigned  to  its  appropriate  subdivision  of  one  of  these  three. 
The  Interstate  Commerce  Commission  has  prescribed  a  form  of 
general  balance  sheet  which  means  a  classification  of  the  assets 
and  liabilities, — this  is  in  addition  to  its  ten  other  classifications. 

If  an  item  is  thrown  in  the  wrong  class  at  the  start,  you  will 
realize  that  the  accounts  are  mis-stated  until  correction  is  made, 
and  then  if  the  correction  is  made  in  the  month  subsequent  to 
that  in  which  it  is  incurred,  it  is  necessary  to  purposely  cause  a 
misstatement  of  the  account  for  the  month  in  which  the  correc- 
tion is  made,  because  we  must  inject  into  that  month  this  cor- 
rection which  has  nothing  to  do  with  the  business  of  that  month. 
Therefore,  it  will  be  understood  how  important  it  is  that  all 
items  shall  be  properly  and  correctly  classified  in  the  first  in- 
stance. The  accounting  officer  of  a  railroad  has  no  small  task  to 
perform  the  duties  of  seeing  to  it  that  all  of  these  innumerable 
items  are  properly  classified  and  combined  into  the  final  state- 
ment presented  to  the  executive  officers.  I  know  from  bitter 
experience  that  when  errors  are  found  in  that  statement,  the 
accounting  officer  is  the  first  man  "on  the  carpet."  Some  of  you 
operating  men  who  think  the  accounting  officer  is  a  grouch, 
Avould  form  a  better  opinion  of  him  if  you  knew  that  he  only 
passed  along  to  you  the  kicks  which  he  receives  from  his  supe- 
rior, when  an  error  is  found  in  one  of  the  statements.  How- 
ever, I  take  it  from  the  subject  which  was  given  to  me,  and 
which  appears  at  the  head  of  this  paper,  that  it  was  not  ex- 
pected that  this  paper  should  deal  with  the  details  of  railway 
accounts  in  general,  but  that  it  should  deal  particularly  with 
the  problems  of  federal  requirements  and  their  application  to 
the  accounts  with  which  the  operating  men  come  in  contact. 

First,  a  few  words  about  the  Acts  of  Congress  which  caused 
the  problems  which  we  are  to  discuss  tonight.  The  accounting 
problems  resulting  from  federal  requirements  began  first  in 
1887,  when  by  Act  of  Congress,  the  pooling  of  traffic  was  pro- 


Raihvay  Accounting  Under  Federal  Requirements  3 

hibited  and  the  Interstate  Commerce  Commission  was  created. 
At  that  time  the  writer  of  this  paper  was  pool  clerk  on  the  old 
Cotton  Belt  Railroad,  and  having  taken  a  wife  in  December, 
1886,  the  prospect  of  being  thrown  out  of  work  by  the  aboli- 
tion of  railroad  pools,  presented  a  big  personal  problem  with 
which  the  operating  men  did  not  come  in  contact.  The  twen- 
tieth section  of  the  same  act  required  annual  reports  from  com- 
mon carriers  to  the  Interstate  Commerce  Commission.  Shortly 
after  the  passage  of  this  act,  a  number  of  accounting  officers  met 
with  the  Auditor  of  the  Interstate  Commerce  Commission  and 
assisted  in  the  formulation  of  the  annual  report  that  was  after- 
wards required.  The  compilation  of  an  annual  report  obviously 
meant  classifications,  arrangement,  etc.  From  time  to  time,  sub- 
sequently, the  Interstate  Commerce  Commission  promulgated 
requirements  with  respect  to  the  accounts  of  the  carriers,  and 
additional  data  called  for  in  their  annual  report. 

The  Association  of  American  Railway  Accounting  Officers, 
which  sprang  into  existence  in  1887,  has  always  co-operated 
with  the  Interstate  Commerce  Commission  and  that  co-opera- 
tion has  been  appreciated.  For  many  years  prior  to  and  since 
the  passage  of  the  Hepburn  Act,  the  Accounting  Officers  irivited 
representatives  of  the  Interstate  Commerce  Commission  to  meet 
with  them  in  their  annual  conventions,  where  the)''  were  accord- 
ed the  privilege  of  the  floor,  and  in  that  way,  the  Accounting 
Officers  all  over  the  United  States  formed  an  acquaintance  v.'ith 
those  representatives  which  has  been  helpful  all  through  the 
years,  to  a  better  understanding  between  the  Railway  Ac- 
counting Officers  and  the  accounting  representatives  of  the 
Interstate  Commerce  Commission. 

Prior  to  the  passage  of  the  Interstate  Commerce  Act  in  1887, 
besides  the  poohng  of  freight  the  railroads  had  paid  rebates  to 
large  shippers,  against  which  there  was  no  law  at  that  time. 
The  pooling  of  freight  was  a  plan  of  the  railroads  to  avoid  the 
payment  of  rebates ;  as,  for  example,  one  pool  that  is  recalled  is 
that  of  the  Texas  Traffic  Association,  which  provided  that  each 


4         Railway  Accounting  Under  Federal  Requirements 

railroad  operating  in  the  State  of  Texas  should  receive  a  cer- 
tain percentage  of  the  earnings  of  all  of  the  railroads  regardless 
of  the  amount  of  traffic  actually  carried.  If  one  railroad  under 
the  pool  arrangement  should  receive  5  per  cent  of  the  total 
earnings  of  all  railroads,  and  if  it  actually  carried  over  its  line 
8  per  cent  of  the  total  earnings,  it  was  obliged  to  give  up  3  per 
cent,  or  all  in  excess  of  the  5  per  cent  to  which  it  was  entitled. 
On  the  other  hand,  if  the  same  road  earned  only  3  per  cent,  it 
collected  from  the  pool  from  funds  paid  in  by  others  who  car- 
ried in  excess  of  their  proportion,  the  additional  2  per  cent. 
Under  those  conditions  there  was  no  incentive  for  one  railroad 
to  pay  a  rebate  or  reduce  the  charge  or  make  any  special  effort 
to  secure  the  traffic  over  its  own  line.  Therefore,  when  the 
pooling  of  freight  was  prohibited,  the  temptation  for  the  pay- 
ment of  rebates  was  restored.  The  same  act  of  1887  prohibited 
what  are  known  as  rebates ;  that  is,  by  means  of  refunds  to  cer- 
tain shippers,  giving  such  shippers  in  effect  a  reduced  rate  as 
compared  with  the  amount  paid  by  other  shippers,  but  through 
the  pressure  brought  to  bear  by  the  shippers  and  the  eagerness 
of  each  traffic  official  to  make  a  good  showing  for  his  road, 
and  thus  retain  his  position  and  make  himself  eligible  for  ad- 
vancement, the  payment  of  rebates  became  quite  prevalent.  This 
was  all  stopped  by  the  Hepburn  Act,  which  was  passed  in  June, 
1906,  and  became  effective  in  August,  1906.  Under  the  Hep- 
burn Act  the  Interstate  Commerce  Commission  was  authorized 
to  employ  inspectors  to  examine  the  books  and  accounts  of  rail- 
roads, and  that  provision  effectively  stopped  the  payment  of 
rebates,  because  if  any  such  payments  were  made,  they  would 
be  disclosed  by  an  examination  of  the  books  and  records. 

Naturally,  the  accounting  requirements  became  more  bur- 
densome after  the  passage  of  the  Hepburn  Act.  It  so  happened 
that  on  the  very  day  that  act  was  passed  by  Congress,  the  As- 
sociation of  American  Railway  Accounting  Officers  was  in  ses- 
sion at  Bluff  Point,  N.  Y.  It  also  happened  that  just  prior  to 
that  time  a  committee  of  twenty-five  was  created  by  the  Ac- 


Railway  Accounting  Under  Federal  Requirements  5 

counting  Officers'  Association,  to  take  up  questions  in  so-called 
liigher  accounting;  the  committees  prior  to  that  considered 
only  freight,  passenger  and  disbursement  accounts.  The  Ac- 
counting Officers  voted  immediately  to  offer  the  services  of  this 
new  committee  to  the  Interstate  Commerce  Commission  in 
connection  with  the  formulation  of  the  new  system  of  accounts 
required  under  the  Hepburn  Act. 

Mr.  Henry  C.  Adams,  at  that  time  in  charge  of  statistics  and 
accounts  for  the  Interstate  Commerce  Commission,  was  in  the 
annual  meeting  at  Bluff  Point,  N.  Y.,  and  assured  the  Associa- 
tion of  Accounting  Officers  that  the  sei-vices  of  this  newly  cre- 
ated commiittee  would  be  heartily  welcomed.  From  that  time  to 
the  present  time  this  Committee  of  Twenty-five,  of  which  the 
writer  of  this  paper  has  been  continuously  a  member  with  the 
exception  of  one  year,  in  which,  by  his  urgent  request,  his 
name  was  dropped  from  the  committee, — has  been  meeting 
with  Mr.  Adam.s  and  his  successors,  anywhere  from  four  to 
twelve  times  a  year.  As  hereinbefore  stated,  Mr.  Adams  had 
been  meeting  with  the  Accounting  Officers  of  railroads  in  their 
annual  conventions  for  many  years  prior  to  the  Hepburn  Act, 
and  the  wisdom  of  the  accounting  officers  in  promoting  that  re- 
lationship was  confirmed  by  the  way  in  which  Mr.  Adams  took 
them  into  his  confidence  when  he  started  to  formulate  the  new 
scheme  of  accounts  to  be  promulgated  by  the  Interstate  Com- 
merce Commission. 

At  the  first  meeting  of  the  Committee  of  Twenty-five,  Mr. 
Adams  frankly  laid  his  plans  before  the  committee,  stating 
that  he  had  been  importuned  by  many  accountants, — both  ex- 
pert and  so-called  expert,  seeking  employment  with  him  in  the 
production  of  a  system  of  railroad  accounts.  However,  he  stated 
that  he  had  no  idea  of  turning  the  matter  over  to  them,  but  that 
from  his  association  with  the  Railway  Accounting  Officers  he 
believed  he  could  secure  the  most  valuable  assistance  from  this 
Committee  of  Twenty-five  Chief  Accounting  Officers  of  Rail- 
roads.    Those  twenty-five  men  were  representing  mostly  the 


6  Raihvay  Accounting  Under  Federal  Requirements 

largest  railroads  in  the  country.  As  I  recall,  there  was  some- 
thing like  60  per  cent  of  the  railroad  mileage  of  the  country  rep- 
resented. He  had  learned  that  there  were  different  methods  of 
accounting  in  vogue  by  the  different  railroads;  he  had  heard 
the  merits  of  these  different  methods  presented  in  the  annual 
conventions.  He  stated  it  was  his  idea  that  the  system  of  ac- 
counts to  be  promulgated  by  the  Interstate  Commerce  Com- 
mission should  be  what  he  would  call  the  best  American  prac- 
tice ;  that  \s,  it  would  be  his  idea  to  select  what  would  eventually 
be  termed  the  best  practice  for  classifying  each  item,  and  adopt 
that  as  the  standard  to  be  embodied  in  the  accounting  orders 
by  the  Interstate  Commerce  Commission.  He  was  more  or  less 
familiar  with  the  methods  of  handling  accounts  of  railways  in 
Europe,  but  he  did  not  undertake  to  import  any  European  ideas 
into  his  plan. 

With  the  best  American  practice  as  a  platform,  he  sat  down 
with  the  Committee  of  Twenty-five  to  go  over  the  entire  scheme 
of  accounts,  item  by  item.  Of  course,  I  believed  that  he  would 
adopt  the  Rock  Island  classification  as  being  the  best  American 
practice.  There  were  twenty-four  other  gentlemen  on  the  com- 
mittee who  had  similar  ideas.  However,  we  discussed  the 
merits  of  the  various  ideas, — Mr.  Adams  sometimes  participat- 
ing in  the  discussions,  but  more  frequently  sitting  by  as  a  care- 
ful listener,  with  one  or  two  stenographers  taking  notes  all  the 
while,  so  that  the  salient  points  in  the  discussions  might  be  pre- 
served, and  reserving  to  himself  the  final  judgment  as  to  what 
method  to  adopt.  In  that  way,  Mr.  Adams  proceeded  to  for- 
mulate a  scheme  of  accounts  which  is  now  observed  b)^  all  rail- 
roads in  the  United  States,  and  which  I  believe  does  really  rep- 
resent, as  a  whole,  the  best  American  practice. 

One  point  was  urged  by  the  Railway  Accounting  Officers 
from  the  beginning  and  through  all  of  our  conferences  dovv'n 
to  the  present  time ;  namely,  that  the  Interstate  Commerce 
Commission  would  promulgate  the  principles,  requirements 
and   classifications   without   prescribing   special    forms   of   ab- 


Raihvay  Accounting  Under  Federal  Requirements 


7 


stracts,  reports,  waybills,  vouchers,  pay  rolls,  etc.,  etc. 
The  Accounting  Officers  assured  him  that  if  he  would  re- 
strict his  accounting  scheme  to  classifications  of  the  items 
included  in  each  account,  we  would  observe  his  require- 
ments and  principles  to  the  letter  and  give  him  the  results  ex- 
pressed in  figures  which  would  be  compiled  with  painstaking 
accuracy.  V<q  wished  to  be  left  free  to  have  some  initiative  of 
our  ovi'n  with  regard  to  the  method  of  the  detailed  compilation 
from  the  original  record  up  to  the  final  figures  that  are  reported 
to  the  Interstate  Commerce  Commission.  \\&  urged  that  the 
dififerences  in  the  organization  of  dififerent  companies,  and  the 
differences  in  local  conditions,  were  such  as  to  cause  diversity 
in  detailed  practices,  and  that  the  Railway  Accounting  Officers 
should  be  left  free  to  prescribe  such  detailed  methods  for  the  in- 
dividual railroads  on  the  assurance  that  the  final  results  re- 
ported to  the  Interstate  Commerce  Commission  would  be  a 
strict  and  accurate  compliance  with  the  classifications  of  ac- 
counts ordered. 

We  were  fortunate  in  having  a  broadminded,  far-seeing  man 
like  ]\Ir.  Adams  to  deal  Avith  at  that  time ;  one  less  astute  might 
have  insisted  upon  prescribing  detailed  forms  and  methods  of 
compilations  for  the  various  railroads,  deluding  himself  with  the 
idea  that  only  in  that  way  could  uniformity  of  results  be  pro- 
duced. Furthermore,  we  explained  that  with  the  rapid  intro- 
duction of  computing  machines,  our  methods  of  detailed  com- 
pilation were  bound  to  change  frequently,  and  if  we  found  we 
could  handle  a  certain  piece  of  work  more  economically  by  in- 
troducing machines,  we  did  not  want  to  have  such  economy  de- 
layed by  waiting  for  an  order  from  the  Interstate  Commerce 
Comrnission.  Also,  that  the  organization  on  one  railroad  m.ight 
he  such  that  the  use  of  certain  machines  would  produce  substan- 
tial economy,  while  on  another  railroad,  due  to  a  different  or- 
ganization, the  same  machines  miglit  not  produce  any  economy 
at  all,  but  might  possibly  increase  the  expense.  Larger  roads 
could  make  use  of  many  accounting  machines  and  we  did  not 


8  Railway  Accomiting  Under  Federal  Requirements 

wish  to  have  methods  prescribed  which  might  preclude  or  defer 
their  use.  Speaking  of  accounting  machines,  I  am  reminded 
that  some  years  ago  that  grand  Santa  Fe  statistician,  Mr.  James 
Peabody,  recently  called  to  his  heavenly  reward,  and  myself 
were  walking  through  the  Skirvin  Hotel  in  Oklahoma  City, 
when  a  native  Oklahoman,  who  knew  us  by  sight,  said,  "There 
go  them,  two  railroad  addin'  machines." 

Be  it  said  to  the  credit  of  Mr.  Adams  and  his  successors,  that 
up  to  the  present  time,  the  wishes  of  the  Accounting  Officers 
with  regard  to  being  left  free  to  prescribe  the  details  of  com- 
pilations of  the  classifications  of  accounts  on  the  individual  rail- 
roads, have  been  respected  to  the  profit  of  the  railroads  and 
also  to  the  profit  of  the  Interstate  Commerce  Commission.  Now, 
I  have  felt  that  it  was  advisable  to  take  this  much  of  your  time 
to  let  you  on  the  inside  a  little  bit  as  to  how  these  accounts 
came  into  being.  I  do  not  think  that  that  situation  is  generally 
understood  and  in  the  rest  of  the  paper  I  will  tiy  to  get  down 
to  the  problems. 

The  first  classification  that  was  undertaken  by  Mr.  Adams 
and  the  committee  was  that  of  operating  expenses.  In  connec- 
tion with  that  classification,  it  was  also  necessary  to  consider 
at  the  same  time  the  classification  of  expenditures  for  road  and 
equipment,  or  in  other  words,  the  expenditures  for  capital  ac- 
count. After  the  classification  of  operating  expenses  came, 
necessarily,  a  classification  of  operating  revenues.  Prior  to  that 
time  the  term  "gross  earnings"  had  been  used  to  designate  what 
are  now  called  operating  revenues.  Some  of  us  still  use  that 
term,  and  I  should  like  to  put  in  a  plea  right  here  that  we  use 
the  official  term  "revenues,"  and  from  what  immediately  fol- 
lows I  think  you  will  appreciate  the  importance  of  it.  The  Ac- 
counting Officers  were  almost  unanimously  opposed  to  the  con- 
tinuation of  the  use  of  the  term  "earnings"  as  appHed  to  gross 
receipts,  because  the  tenn  "earnings"  created  an  erroneous  im- 
pression. In  connection  with  banking  and  many  classes  of  busi- 
ness, the  term  "earnings"  refers  to  what  is  left  after  the  ex- 


Raikvay  Accounting  Under  Federal  Requirements  9 

penses  and  cost  of  maintenance  have  been  deducted  from  the 
gross  receipts,  while  with  railroads,  the  term  "earnings"  had 
been  applied  to  the  gross  receipts.  If  the  earnings  of  Railroad 
"A"  for  example  were  referred  to  in  the  public  press  as  $75,- 
000,000,  the  impression  was  created  that  that  large  sum  of 
money  represented  profits  available  for  dividends ;  but  when  the 
operating  expenses,  taxes,  rentals  and  interest  were  deducted 
therefrom,  which  ordinarily  would  leave  about  $5,000,000, 
the  figure  thus  left  would  be  the  one  that  would  generally  be 
called  earnings  in  banking  and  commercial  business.  Many  of 
us  were  in  favor  of  using  the  word  "receipts,"  and  the  word 
"revenues"  was  finally  adopted  as  a  sort  of  compromise  between 
"earnings"  on  the  one  hand  and  "receipts"  on  the  other. 

As  to  operating  expenses,  the  first  subdivision  which  nat- 
urally came  before  the  committee  in  joint  conference  with  Mr. 
Adams,  was  that  of  Maintenance  of  Way  and  Structures,  and 
under  this  subdivision  is  included  a  very  large  portion  of  the 
items  which  require  consideration  of  capital  expenditures  in 
connection  with  the  cost  of  maintanance.  Prior  to  July  1,  1907, 
the  Interstate  Com.merce  Commission  prescribed  a  classifica- 
tion of  operating  expenses,  showing  how  the  items  that  were 
put  into  operating  expenses  should  be  classified;  but  that  classi- 
fication made  little  or  no  attempt  to  prescribe  what  items  should 
be  included  therein;  as,  for  example,  under  the  old  classifica- 
tion, many  railroads  charged  the  entire  cost  of  all  ballast,  all 
new  rails,  all  additional  side  tracks,  all  new  bridges  with  the  ex- 
ception of  very  large  steel  bridges,  and  many  other  items,  to 
operating  expenses,  while  other  railroads  charged  to  operating 
expenses  only  the  cost  to  renew  bridges  in  kind,  and  as  to  rails, 
charged  the  increased  weight  of  rails,  and  as  to  side  tracks 
charged  the  cost  of  all  additional  side  tracks  to  capital  account. 
In  other  words,  it  was  found  that  quite  a  few  railroads  had 
taken  the  advanced  step  of  drawing  the  line  between  operating 
expenses  and  capital  account  in  connection  with  the  renewal  of 
existing  structures  and  facilities.    Many  heated  arguments  were 


10        Railway  Accounting  Under  Federal  Requirements 

indulged  in  on  this  question  of  the  division  of  expense  of  re- 
newals of  existing  structures  between  additions  and  betterments, 
and  operating  expenses.  Those  arguments  were  between  the 
accounting  officers  themselves;  Mr.  Adams  got  the  benefit  of 
them.  On  the  one  hand,  certain  accounting  officers, — largely 
those  that  had  followed  that  practice,  maintained  that  when  a 
steel  bridge  was  erected  to  replace  a  wooden  structure  there  was 
a  distinct  betterment  to  the  property,  which  should  be  recog- 
nized by  an"  appropriate  charge  to  the  capital  account.  On  the 
other  hand,  those  who  had  been  following  a  dififerent  practice 
argued  from  their  convictions  just  as  conscientiously  as  the  oth- 
ers, that  the  substitution  of  steel  bridges  for  wooden  bridges 
was  required  by  the  progress  of  the  art  of  railroading;  that 
the  substitution  of  heavier  rails  for  lighter  rails  was  also  a  re- 
quirement of  such  progress,  and  that  the  entire  cost  of  such  re- 
newals with  improved  structures  and  facilities,  should  be 
charged  to  operating  expenses,  so  that  the  operating  expenses 
of  a  railroad  when  stated,  would  include  the  entire  cost  of 
keeping  the  property  up  to  date.  These  accountants  pointed  to 
the  railways  of  England  which  years  ago  adopted  the  practice 
of  charging  large  sums  to  additions  and  betterments,  repre- 
sented by  improved  facilities  and  structures,  such  as  increased 
weight  of  rails,  etc.,  and  the  result  of  such  practice  is  that  their 
capitalization  is  now  $250,000  to  $275,000  per  mile  of  road. 
They  claimed  that  such  a  policy  would  lead  to  the  over-capitali- 
zation of  the  railroads  in  the  United  States.  They  claimed  that 
the  plan  of  charging  the  full  amount  of  these  improvements 
necessary  to  keep  up  with  the  progress  of  the  art  of  railroading 
was  a  conservative  practice  and  would  be  commended  by  busi- 
ness men  as  a  sound  method.  On  the  other  hand,  the  others 
claimed  that  any  additions  or  betterments  to  property  should  be 
represented  in  the  capital  account  so  that  the  books  of  the  com- 
pany would  show  the  true  investment  in  the  property  and  also 
the  true  net  income  from  operation.  INIr.  Adams  decided,  as 
you  gentlemen  all  knovv-.  to  adopt  the  plan  by  which  each  addi- 


Raikvay  Accounting  Under  Federal  Requirements        11 

tion  and  betterment  expenditure  is  charged  to  the  capital  ac- 
count. Subsequently  a  classification  showing  such  items,  which 
are  chargeable  to  additions  and  betterments,  was  ordered  by 
the  Interstate  Commerce  Commission. 

However,  Mr.  Adams  injected  into  his  scheme  of  accounts, 
an  option  to  charge  to  operating  expenses,  small  items  costing 
less  than  $300  which  v/ould  theoretically  be  chargeable  to  addi- 
tions and  betterments, — the  object  being  to  relieve  the  prop- 
erty account  from  the  multitude  of  small  expenditures  which, 
in  theory,  would  be  proper  charges  to  the  capital  account  but 
which,  as  a  practical  proposition,  should  be  eliminated  there- 
from. Certain  exceptions  were  made  to  this  minimum  charge, 
such  as  tracks,  additional  land,  etc.  This  minimum  rule  pre- 
vailed until  after  the  federal  valuation  bureau  was  created, 
which  bureau  finally  requested  that  that  option  be  withdrawn 
and  all  additions  and  betterments  regardless  of  the  amount  of 
expenditure,  charged  to  capital  account.  Since  then  the  fed- 
eral valuation  bureau  has  thought  better  of  the  matter  and  it  is 
now  believed  that  they  are  anxious  to  have  this  rule  modified 
because  the  present  rule  is  putting  into  the  records  of  the  val- 
uation bureau  a  multitude  of  details  covering  these  small  ex- 
penditures. Some  of  the  difficulties  which  come  up  in  connec- 
tion with  these  small  items,  will  be  apparent  when  they  are 
mentioned;  as,  for  example,  under  the  rules  as  they  exist  to- 
day, which  provide  that  every  expenditure  for  an  addition  or 
betterment  to  the  property,  however  small,  must  be  charged  to 
the  capital  account,  we  are  required  to  charge,  for  illustration, 
the  cost  of  a  new  shelf  which  is  added  to  an  office  on  which  to 
place  files.  The  cost  of  that  shelf  may  be  37  cents  for  labor 
and  material.  In  the  course  of  a  year  or  two  that  shelf  is 
knocked  out  to  make  room  for  something  else,  or  because 
it  is  in  the  way,  but  when  it  is  taken  down,  the  chances  are 
about  10  to  1  no  one  will  remember  that  its  cost  should  be 
written  out  of  property  account.  Such  a  proceeding  involves 
the  process  of  making  what  some  roads  call  an  "authority  for 


12        Raihvay  Accounting  Under  Federal  Requirements 

expenditure"  which  must  go  the  rounds  of  approval  and  be  re- 
corded in  the  regular  manner  in  order  to  get  a  37-cent  item  out 
of  the  property  account.  It  being  so  small,  however,  as  I  said 
before,  the  chances  are  at  least  10  to  1  that  some  one  will  take 
a  hammer  and  knock  the  shelf  out,  pull  the  nails  and  that  will 
be  the  end  of  it.  A  stationery  case  may  be  put  in  its  place,  cost- 
ing say  $6.00  for  labor  and  material.  Then  in  the  course  of  two 
or  three  years  it  is  decided  to  store  the  stationery  supplies  some 
place  else;  another  receptacle  is  provided,  its  cost  charged  to 
capital  account  and  the  old  stationery  case  will  be  torn  out.  At 
that  time,  it  is  very  likely  that  no  one  will  think  about  issuing 
the  necessary  document  which  will  write  the  cost  of  the  old 
stationery  case  out  of  the  capital  account.  In  fact,  a  strict  appli- 
cation of  the  present  rules  will  lead  in  many  cases  to  very  ridicu- 
lous situations.  Each  such  small  item  affecting  capital  account 
must  be  reported  in  detail  to  the  Interstate  Commerce  Commis- 
sion. It  is  believed  that  the  Interstate  Commerce  Commission 
in  the  near  future  will  modify  its  orders  and  will  probably  make 
a  mandatory  order  requiring  all  items  under  a  certain  minimum, 
which  minimum  will  perhaps  not  exceed  $100,  to  be  charged 
to  operating  expenses,  even  though  theoretically  the  expendi- 
ture should  be  charged  to  additions  and  betterments.  Please 
do  not  draw  the  inference  that  the  writer  of  this  paper  claims 
to  have  inside  information  as  to  what  the  Commission  will  do. 
In  a  certain  rate  case  I  succeeded  in  getting  into  the  record  a 
guess  as  to  what  the  I.  C.  C.  would  do,  and  a  proxy  friend  of 
mine  wrote  the  I.  C.  C.  complaining  of  the  "leak."  We  have 
heard  about  "leaks,"  recently.  I  received  a  letter  from  the  I. 
C.  C.  stating  that  the  thing  complained  of  was  similar  to  what 
Mark  Twain  said  about  his  own  obituary  written  by  a  friend 
who  was  misinformed  that  he  was  dead, — "Greatly  exagger- 
ated." 

The  accounting  officers  will  generally  welcome  some  such 
change,  and  I  believe  the  operating  officers  will  also.  While  the 
change  would  mean  slight  additional  charges  to  operating  ex- 


Raihvay  Accounting  Under  Federal  Requirements        13 

penses,  yet  the  amounts  involved  will  not  be  large,  and  it  will 
prevent  the  necessity  of  keeping  track  of  the  details  of  innum- 
erable small  transactions,  and  also  prevent  the  carrying 
into  our  property  account  of  a  lot  of  little  items  which  will 
never  be  written  out  when  they  actually  disappear  from  the 
property.  On  the  other  hand,  some  accounting  officers  still 
favor  the  present  rule,  and  a  very  prominent  accounting  offi- 
cer, who  has  written  much  on  the  subject  of  railroad  accounts, 
goes  so  far  as  to  state  that  if  a  right  of  way  board  fence  is  con- 
structed with  one  nail  in  each  board  to  each  post,  and  if  later 
the  fence  is  gone  over  and  an  additional  nail  put  into  each 
board  at  each  post,  the  cost  of  each  such  additional  nail  and  the 
application  thereof  should  be  added  to  the  capital  account.  That 
was  written  some  time  ago,  before  we  had  so  many  wire  fences. 
Theoretically,  he  is  right,  but  in  the  interest  of  accuracy  in  the 
final  statement  of  our  property  account,  and  for  the  purpose  of 
reducing  headaches  for  both  the  operating  and  accounting  de- 
partment employes  of  the  railroad  company,  he  is  wrong 
Knowing  that  it  will  be  impossible  to  have  an  option  of  any 
kind  restored,  we  should  have  an  order  of  the  Interstate  Com- 
merce Commission  requiring  that  all  expenditures  for  additions 
and  betterments,  involving  less  than  $100  in  any  one  instance, 
shall  be  charged  to  operating  expenses. 

One  of  the  matters  in  which  you  gentlemen  are  largely  inter- 
ested, and  which  provoked  a  lot  of  discussion  in  the  meetings 
of  the  Committee  of  Twenty-five  and  with  Mr.  Adams,  was 
the  matter  of  depreciation.  At  the  start,  Mr.  Adams  had  in 
his  mind  pretty  thoroughly,  that  an  adequate  charge  should 
be  made  against  the  current  operations  of  the  carriers,  and  be 
included  in  their  operating  expense  accounts  for  depreciation 
of  all  property,  including  both  fixed  property  and  equipment. 
He  contended  that  depreciation  was  going  on  from  year  to 
year,  and  that  the  operations  for  each  year  should  stand  their 
share  of  the  depreciation,  and  unless  such  depreciation  charge 
was  made,  the  income  account  of  the  company  was  not  correctly 


14        Railway  Accounting  Under  Federal  Requirements 

stated.  Some  of  the  members  of  the  committee  agreed  with  Mr. 
Adams,  but  the  majority  did  not.  As  to  the  fixed  property,  a 
large  majority  of  the  committee  contended  that  if  the  work  of 
maintenance  was  kept  up  to  the  proper  standard,  there  was  no 
depreciation  running  from  year  to  year ;  or,  in  other  words,  that 
the  fixed  property  was  permanent,  and  what  depreciation  there 
was,  if  any,  depended  upon  the  standard  of  maintenance  that 
was  adopted  by  the  individual  carrier.  It  was  claimed  that  the 
road  bed,  from  year  to  year  as  it  solidified  and  seasoned,  im- 
proved rather  than  depreciated,  aside  from  the  erosion  on  the 
sides  of  the  embankments  and  cuts,  which  become  the  subject  of 
maintenance  expenditures  from  time  to  time.  A  goodly  number 
of  the  committee  contended  that  a  similar  condition  obtained 
with  regard  to  equipment,  and  it  was  stated  in  the  committee 
that  unless  conditions  changed  which  demanded  a  different  type 
of  locomotive,  the  various  parts  of  a  locomotive  could  be  re- 
newed from  time  to  time  until  finally  there  would  be  nothing  left 
of  the  original  locomotive  but  the  number.  Yet  if  all  these  re- 
newals were  charged  to  operating  expenses  as  they  went  along, 
the  locomotive  would  be  maintained.  On  the  other  hand,  it 
was  found  that  the  size,  capacity,  and  in  many  cases  the  type  of 
equipment  had  been  subject  to  frequent  changes  in  the  past, 
and  that  the  depreciation  due  to  obsolescence,  was  a  real  factor 
to  be  reckoned  with. 

The  final  outcome  of  all  this  controversy  was  that  the  repre- 
sentatives of  the  Interstate  Commerce  Commission  agreed  that 
if  the  committee  would  not  seriously  oppose  the  accounts  cov- 
ering depreciation  on  rolling  stock,  the  matter  of  depreciation 
on  fixed  property  would  be  waived,  and  so  the  first  classification 
of  operating  expenses  provided  for  depreciation  of  equipment, 
but  omitted  depreciation  on  fixed  property.  The  last  classifi- 
cation promulgated,  which  became  effective  July  1,  1914,  con- 
tains permissive  provisions  for  depreciation  on  fixed  property ; 
that  is  to  say,  the  carriers  now  may,  if  they  so  elect,  make 
charges  against  maintenance  of  way  and  structure  accounts  for 


Railway  Accounting  Under  Federal  Requirements        15 

depreciation  of  fixed  property.  So  far  as  my  knowledge  goes, 
very  few,  if  any,  railroads  are  making  any  charges  to  operat- 
ing expenses  for  depreciation  on  fixed  property. 

In  promulgating  the  classification  which  provides  for  depre- 
ciation on  rolling  stock,  no  fixed  percentages  were  ordered  by 
the  Interstate  Commerce  Commission,  but  the  matter  of  per- 
centage was  left  to  the  carriers.  The  result  was  anything  but 
uniformity,  because  the  carriers  charged  varying  percentages 
from  nothing  up  to  6  per  cent. ;  usually,  according  to  the  pros- 
perity of  the  company.  One  small  railroad^  which  produced  an 
annual  deficit  of  nearly  $1,000,000,  made  no  charges  whatever  to 
depreciation  on  equipment,  while  another  railroad  which  was 
quite  prosperous,  charged  to  depreciation  of  equipment  6  per 
cent,  per  annum.  In  the  old  copy  books,  when  w^e  were  boys, 
many  of  us  learned  penmanship  by  copying  the  old  saying — 
"Many  men  of  many  minds,"  and  in  connection  with  this  depre- 
ciation on  equipment,  there  were  certainly  many  minds  be- 
cause nearly  all  the  rates  and  fractions  thereof,  between  nothing 
and  6  per  cent,  were  used;  that  is  to  say,  some  roads  charged 
34  of  1  per  cent. ;  some  ^  of  1  per  cent. ;  some  ^ ;  some  1 
per  cent. ;  some  1^4  per  cent.,  and  so  on,  up  to  6  per  cent.  On 
the  other  hand,  it  should  be  remembered  that  the  Interstate 
Commerce  Commission  also  included  in  the  classification  of 
operating  expenses,  what  are  known  as  the  renewal  accounts 
under  the  head  of  Maintenance  of  Equipment.  These  renewal 
accounts  took  up  the  slack,  so  to  speak,  because  to  those  ac- 
counts, when  a  car  is  destroyed,  mvist  be  charged  the  difference 
between  the  original  cost  of  the  car  on  the  one  hand,  and  on  the 
other,  the  sum  of  the  salvage  and  the  amount  which  had  been 
previously  charged  to  the  regular  depreciation  account.  To 
illustrate :  If  a  car  is  destroyed  which  is  20  years  old,  the  rules 
require  that  the  original  cost  thereof,  which  we  will  say  was 
$800,  shall  be  credited  to  the  property  account,  and  charged  as 
follows:  Supposing  $100  salvage,  and  $700  net  loss.  The 
$100  goes  to  the  material  account  and  of  the  $700,  so  much 


16        Railway  Accounting  Under  Federal  Requirements 

as  has  already  been  credited  to  the  depreciation  account  and 
charged  to  operating  expenses  in  the  regular  depreciation 
charge  shall  be  charged  to  the  depreciation  reserve,  and  the  re- 
mainder shall  be  charged  to  renewal  account  under  operating 
expenses.  If  a  road  has  charged  nothing  to  depreciation  during 
the  30  years  of  the  life  of  the  car^  it  has  no  credit  reserve  set  up, 
and  therefore,  must  charge  the  full  $700  to  operating  expenses 
under  the  renewal  account.  If  a  road  has  charged  ^  of  1  per 
cent,  for  the  20  years,  it  will  have  5  per  cent,  of  the  depreciable 
value  of  the  car,  or  5  per  cent,  of  $700  or  $35.00  in  the  deprecia- 
tion fund,  and  it  will  charge  $35.00  to  the  depreciation  reserve 
and  $665.00  to  operating  expenses  under  the  renewal  account. 
If  the  road  has  been  charging  5  per  cent,  per  annum  for  depre- 
ciation, it  will  have  the  full  $700  set  up  in  its  depreciation  re- 
serve account  and  will  charge  the  $700  to  that  account,  and 
nothing  to  operating  expenses  under  the  head  of  renewals.  So 
you  see  the  road  that  charges  the  small  rate  of  depreciation 
simply  puts  off  the  evil  day,  because  in  the  end,  the  difference 
between  the  salvage  and  the  original  cost  of  the  car  must  go  to 
operating  expenses,  either  under  the  depreciation  account  cur- 
rently, or  under  the  head  of  the  renewal  account  when  the  car 
is  destroyed. 

It  may  be  interesting  to  you  to  know  that  a  few  months  ago 
the  Interstate  Commerce  Commission  sent  out  special  circulars 
calling  for  data  concerning  the  depreciation  charge,  including 
among  other  things,  the  rate  at  which  depreciation  is  computed. 
Some  roads  have  been  called  upon  to  justify  the  rates  which 
they  charge,  and  those  roads  which  have  been  so  called  upon, 
have  been  charging  less  than  2  per  cent,  per  annum.  This 
would  lead  one  to  believe  that  while  the  Commission  is  not  yet 
ready  to  promulgate  a  uniform  rate  for  all  railroads,  yet  it  has 
progressed  far  enough  in  the  study  of  this  subject  to  believe  that 
anything  less  than  2  per  cent,  is  inadequate.  The  Commission 
would  have  saved  itself  much  embarrassment  if  it  had  deferred 
the  ordering  of  depreciation  until  it  had  studied  the  subject  suf- 
ficiently to  be  able  to  order  a  minimum  and  maximum  rate. 


Railway  Accounting  Under  Federal  Requirements        17 

With  a  minimum  and  maximum  rate,  of  course,  there  would 
not  be  exact  uniformity,  but  the  range  between  the  minimum 
and  maximum  would  not  be  so  wide  as  the  range  between  noth- 
ing and  6  per  cent. 

Reference  has  hereinbefore  been  made  to  the  difference  of 
opinions  regarding  the  proper  treatment  in  the  accounts  of  the 
cost  of  replacing  existing  structures  with  improved  ones.  Some 
thought  that  the  entire  cost  of  the  new  improved  structure,  as, 
for  example,  a  steel  bridge  substituted  for  a  pile  structure, 
should  all  be  charged  to  operating  expenses ;  others  thought  that 
the  excess  over  the  cost  to  renew  in  kind,  should  be  charged  to 
additions  and  betterments,  and  still  others  thought  that  the  ex- 
cess over  the  original  cost  should  be  charged  to  additions  and 
betterments.  yThe  Interstate  Commerce  Commission  at  first 
ordered  the  second  plan ;  namely,  that  the  cost  in  excess  of  the 
cost  to  renew  in  kind,  should  be  charged  to  additions  and  bet- 
terments, but  in  the  latest  classifications,  that  is  changed  so  that 
now  the  cost  in  excess  of  the  original  cost  is  chargeable  to  addi- 
tions and  betterments.  The  fallacy  of  the  first  order,  viz.,  to 
charge  to  additions  and  betterments,  the  excess  over  the  cost  to 
renew  in  kind,  may  be  illustrated  by  the  following  example: 
Suppose  a  pile  structure  which  originally  cost  $5,000  is  renewed 
with  a  steel  bridge  the  total  cost  of  which  was  $25,000 ;  suppose 
that  since  the  original  pile  bridge  was  built,  the  prices  of  labor 
and  material  had  risen,  so  that  when  the  steel  bridge  was  erected  it 
would  have  cost  $10,000  to  renew  the  pile  bridge  in  kind.  There 
was  included  in  the  original  capital  account,  $5,000, — being  the 
original  cost  of  the  construction  of  this  pile  bridge.  Now,  the 
new  steel  bridge  cost  $25,000  and  the  cost  to  renew  in  kind  is 
$10,000,  so  that  the  excess  of  $15,000  is  charged  to  property 
account,  making  a  total  charge  of  $20,000  to  the  property  ac- 
count for  this  steel  bridge.  Now  suppose  that  this  road  con- 
structs a  new  line,  requiring  a  steel  bridge  of  exactly  the  same 
size,  and  spends  $25,000  therefor,  there  would  be  found  in  the 
property  account  of  this  new  road,  $25,000  therefor,  as  the  cost 


18        Railway  Accounting  Under  Federal  Requirements 

of  this  identical  bridge  erected  at  the  same  time  as  the  other 
one,  although  in  the  property  account  there  is  only  $20,000  for 
the  steel  bridge  which  was  erected  to  replace  the  pile  bridge. 
This  defect  has  been  eliminated  in  the  classification  effective 
July  1,  1914,  and  which  is  now  in  effect,  because  at  the  present 
time,  in  the  case  of  the  renewal  referred  to,  the  excess  over  the 
original  cost,  or  $20,000,  would  be  charged  to  capital  account  in 
connection  with  the  erection  of  the  steel  bridge  costing  $25,000, 
so  that  the  result  would  be  to  charge  the  total  cost  of  the  new 
steel  bridge,  viz.,  $25,000,  to  the  capital  account.  The  same  prin- 
ciple applies  in  renewals  of  wooden  bridges  with  brick  or  stone 
structures,  and  all  other  renewals  of  existing  structures  with 
improved  structures, 

/One  item  which  many  think  is  a  proper  charge  to  capital 
account  in  connection  with  renewals,  has  been  omitted ;  namely, 
the  substitution  of  treated  ties  for  untreated  ties.  The  treat- 
ment of  ties  by  the  various  processes  as  well  as  the  treatment 
of  bridge  timbers,  lengthens  the  life  of  such  ties  and  timber,  and 
undoubtedly  produces  improved  ties  and  timbers.  However, 
the  Interstate  Commerce  Commission  requires  the  entire  cost  of 
ties,  both  plain  and  treated,  to  be  charged  to  operating  expenses. 
Some  years  ago  when  the  muck-raking  articles  were  being  writ- 
ten about  railroads.  Everybody's  Magazine  published  one  of 
those  articles  in  which  the  Rock  Island  was  accused  of  misrep- 
resenting its  maintenance  cost  by  charging  the  entire  cost  of 
treated  ties  to  operating  expenses,  whereas  a  considerable  por- 
tion of  that  cost  should  have  been  charged  against  the  capital 
account.  The  article  was  of  the  character  of  many  of  those 
published  at  that  time,  condemning  in  severe  terms  both  the 
honesty  and  ability  of  the  Rock  Island  officials.  The  writer  of 
this  paper  wrote  to  Everybody's  Magazine  at  that  time,  calling 
attention  to  several  mis-statements,  and  misconceptions  by  the 
writer  of  the  article,  explaining  that  the  rules  of  the  Interstate 
Commerce  Commission  which  were  the  law  of  the  land,  re- 
quired that  the  entire  cost  of  treated  ties  be  charged  to  operating 


Railway  Accounting  Under  Federal  Requirements        19 

expenses.  Attention  was  also  drawn  to  the  fact  that  while  the 
writer  of  the  article  implied  that  he  would  like  to  see  a  higher 
moral  standard  among  the  Rock  Island  officials,  yet  in  this 
case,  he  was  deliberately  advising  us  to  violate  the  law  of  the 
land.  Everybody's  Magazine  was  asked  to  publish  a  correction 
of  these  erroneous  and  misleading  statements,  but  such  correc- 
tion was  never  published,  and  it  took  four  letters,  addressed  to 
the  editor  of  the  magazine  to  secure  any  response  whatever,  and 
then  only  through  a  mutual  friend  was  an  acknowledgment 
made.  Prior  to  that  time  I  had  been  a  reader  of  Everybody's, 
but  since  then  I  have  not  read  it,  because  the  officials  of  that 
magazine  shov/ed  plainly  that  they  had  no  hesitation  in  care- 
lessly villi fying  a  man,  and  that  they  would  not  retract  or  cor- 
rect an  error  when  it  was  pointed  out  to  them.  There  is  an 
element  of  betterment  in  the  treated  ties,  but  no  one  knows  hoM^ 
to  measure  it.  The  latest  classification,  however,  provided  that 
the  cost  of  metal  ties  when  substituted  for  wooden  ties  over 
the  cost  of  the  wooden  ties  removed,  shall  be  charged  to  capi- 
tal account. 

Another  important  feature  in  connection  with  the  early  clas- 
sincations  under  the  Hepburn  Act  was  that  the  first  classification 
of  Additions  and  Betterments,  as  many  of  you  may  know,  wa? 
on  v.hat  we  called  a  "commodity"  basis ;  that  is  to  say,  it  was  en- 
tirely different  from  the  classification  of  construction  expendi- 
tures. It  classified  such  expenditures  under  such  heads  as  main 
tracks,  sidings  and  spur  tracks,  terminal  yards,  including  under 
those  headings  all  the  rails,  ties,  grading,  ballast,  fastenings, 
etc.  It  was  impossible  to  add  the  additions  and  betterments 
classification  in  that  shape,  item  by  item,  to  the  construction 
classification  without  re-classifying  the  items.  Therefore,  we 
were  practically  compelled  to  keep  two  classifications  of  addi- 
tions and  betterm.ents.  However,  in  the  revised  classification 
eft'ective  July  1,  1914,  this  has  been  changed  and  now  the  clas- 
sification for  additions  and  betterments  is  the  same  as  the  clas- 
sification for  construction  of  road. 


20        Raihvay  Accounting  Under  Federal  Requirements 

Some  small  items  engaged  a  lot  of  the  attention  of  the  com- 
mittee in  the  early  days,  one  of  which  comes  to  my  mind, — 
that  of  loss  and  damage  to  company  material.  The  Committee 
of  Twenty-five  was  almost  evenly  divided,  probably  reflecting 
former  practices,  about  one-half  claiming  that  when  company 
material  was  lost  or  damaged  in  transit,  the  cost  of  such  loss  or 
damage  should  be  charged  to  the  purpose  for  which  it  was  in- 
tended ;  that  is  to  say,  if  a  lot  of  ties  were  destroyed  in  transit 
by  fire,  the  cost  of  those  ties  would  be  charged  to  ties  just  the 
same  as  if  they  had  been  put  in  the  track;  if  a  lot  of  window 
glass  intended  for  windows  in  coaches  was  smashed  en  route, 
the  cost  thereof  was  to  be  charged  to  repairs  to  passenger  cars 
just  the  same  as  if  it  had  actually  been  put  in  the  coaches.  About 
half  of  the  committee  thought  that  loss  and  damage  to  company 
material  should  be  treated  the  same  as  loss  and  damage  to  com- 
mercial freight;  that  such  loss  and  damage  so  far  as  opera- 
tions were  concerned,  should  not  be  distinguished  from  loss  and 
damage  to  commercial  freight.  Very  often  the  same  mistake 
or  the  same  accident  would  damage  both  commercial  and  com- 
pany freight,  and  it  was  the  claim  that  the  cost  of  the  glass,  for 
example,  that  was  intended  for  the  coaches,  and  which  was 
smashed,  should  be  charged  to  loss  and  damage-freight,  and  not 
to  repairs  to  passenger  cars ;  that  the  cost  of  the  ties  which  were 
burned  up  in  transit  before  they  were  put  in  track,  should  be 
charged  to  loss  and  damage-freight  and  not  to  ties,  under  the 
head  of  maintenance  of  way  and  structures.  The  final  vote  of 
the  committee  was  a  majority  of  one  in  favor  of  charging  such 
losses  to  loss  and  damage-freight.  The  Interstate  Commerce 
Commission's  representatives  saw  it  in  the  same  way,  and  it 
was  so  ordered  in  the  classification  which  was  promulgated. 

An  important  principle  recognized  in  the  Interstate  Com- 
merce Commission  accounts  is  that  the  charges  to  operating  ex- 
penses should  be  based  on  accruals.  In  former  years  it  will  be 
remembered  that  most  of  the  railway  accounts  were  kept  ac- 
cording to  the  month  in  which  the  various  vouchers  and  bills 


Raihvay  Accounting  Under  Federal  Requirements       21 

were  audited,  regardless  of  when  the  expense  accrued.  Some 
times  controversies  will  arise  about  certain  payments  and  no 
vouchers  are  made  for  a  long  period  until  the  controversy  is 
settled.  In  such  cases,  a  large  sum  was  put  into  operating  ex- 
penses in  the  month  in  which  the  vouchers  were  audited,  thus 
distorting  the  showing  for  that  month.  However,  for  years, 
some  roads  had  been  in  the  habit  of  accruing  charges  to  oper- 
ating expenses  by  estimating  from  previous  experience  the 
amounts  that  would  be  due  each  month  on  various  accounts 
when  the  actual  figures  were  not  available ;  that  is  to  say,  if 
company  "A,"  for  example,  used  the  tracks  of  company  "B" 
and  became  indebted  to  company  "B"  regularly  each  month  for 
a  certain  fixed  sum,  say  $5,000  monthly,  and  if  the  vouchers 
therefor,  were  held  up  owing  to  a  dispute,  the  accounting  officer 
of  company  "A"  would  charge  the  proper  operating  expense  ac- 
count each  month  with  $5,000  and  set  aside  that  amount  as  a  re- 
serve to  take  care  of  the  vouchers  when  finally  approved  and 
audited.  When  the  settlement  was  finally  reached,  there  would 
be  a  difference  between  the  estimated  charge  and  the  actual 
amount  finally  determined,  and  that  difference,  whether  a  debit 
or  credit,  would  be  adjusted  when  determined.  This  is  a  great 
improvement  over  the  old  plan  of  waiting  perhaps  for  two  years 
until  the  controversy  was  ended,  and  then  have  $120,000  to 
charge  out  all  in  one  month.  The  Interstate  Commerce  Commis- 
sion recognized  the  principle  of  accruing  or  estimating  these 
charges  in  advance  when  the  regular  bills  and  vouchers  were  not 
rendered  or  audited,  and  in  a  meeting  held  within  the  last  year, 
Mr.  Sweney,  now  in  charge  of  accounts  for  the  Interstate  Com- 
merce Commission,  stated  that  he  did  not  suppose  there  was 
any  well-regulated  railroad  in  the  United  States  that  does  not 
now  keep  its  accounts  on  the  basis  of  accruals,  thus  indicating 
that  he  thought  they  were  not  correctly  kept  unless  on  the  ac- 
crual basis. 

Another  point  which  has  caused  much  controversy  in  connec- 
tion with  these  classifications  is  the  matter  of  abandoned  prop- 


22        Railway  Accounting  Under  Federal  Requirements 

erty.  The  classification  provides  that  when  property  is  retired 
and  replaced,  the  original  cost  thereof  less  salvage,  shall  be 
charged  to  operating  expenses.  This  means  that  if  a  road 
makes  a  cut-off  abandoning  part  of  the  curve  and  shortening 
the  line,  the  original  cost  of  the  old  road,  less  the  salvage,  shall 
be  charged  to  operating  expenses.  This  ruling  was  contested 
by  the  Kansas  City  Southern  Railway,  which,  in  changing  its 
line  some  years  ago,  did  actually  abandon  many  portions  of 
curves.  They  left  the  cost  of  the  old  property  in  the  property 
account,  where  many  railroad  accounting  officers  and  executives 
think  it  should  remain,  and  the  Interstate  Commerce  Commis- 
sion brought  action  against  the  road  to  compel  it  to  charge  off 
the  original  cost  of  such  abandoned  roads.  The  decision  was 
against  the  railroad,  and  it  has  had  to  make  the  charges  as  re- 
quired by  the  classification.  Such  a  rule,  however,  brings  about 
this  situation :  If  it  is  decided  to  reduce  the  grade  of  a  line  by 
by  cutting  down  the  humps  and  filling  in  the  low  places  in  the 
track,  doing  the  work  on  the  old  right  of  way,  the  entire  cost  of 
reducing  the  grade  is  chargeable,  under  this  rule,  to  the  capital 
account.  However,  if  it  is  decided  to  reduce  the  grade  by  aban- 
doning a  certain  portion  of  the  line  and  constructing  a  new 
line  entirely,  the  effect  of  charging  the  cost  of  the  abandoned 
line  to  operating  expenses  means  that  a  very  large  portion  of 
the  cost  of  reducing  the  grade  in  that  way  is  chargeable  to 
operating  expenses.  In  other  words,  if  the  work  is  done  ver- 
tically, the  charge  is  to  capital  account ;  if  it  is  done  laterally,  the 
charge  is  to  operating  expenses.  On  a  certain  railroad  it  so 
happened  that  a  reduction  in  grade  was  contemplated  on  the 
original  right  of  way,  and  bids  were  asked  from  contractors  to 
do  the  work.  One  of  the  contractors  conceived  the  idea  of  re- 
ducing the  grade  by  abandoning  the  old  line  and  constructing  a 
new  line,  and  showed  that  the  cost  thereof  would  be  substan- 
tially less ;  the  saving  was  about  $750,000.  Suppose  that  the  to- 
tal cost  if  done  on  the  old  right  of  way  was  $3,000,000  and  if 
done  by  abandoning  the  old  line  and  constructing  a  new  line, 


Railway  Accounting  Under  Federal  Requirements       23 

the  cost  would  be  $2,250,000.  Suppose  the  original  cost  less 
salvage  of  the  line  thus  abandoned  was  $2,250,000.  If  the  work 
is  done  on  the  old  line  or  vertically,  the  entire  cost  of  $3,000,000 
would  be  chargeable  to  capital  account.  If  performed  by  aban- 
doning the  old  line  and  constructing  a  new  line  or  laterally,  the 
total  cost  would  be  chargeable  to  operating  expenses.  It  was 
pointed  out  to  the  Commission  in  the  Kansas  City  Southern 
case  that  when  a  line  is  projected,  several  surveys  are  made 
and  all  of  them  are  abandoned  but  one;  that  a  line  is  never 
completely  finished;  as  time  progresses  and  the  railroads  pro- 
gress, changes  are  made,  and  the  accounts  promulgated  by  the 
Interstate  Commerce  Commission  should  not  cause  such  dis- 
crepancies as  have  been  illustrated  herein.  The  abandoned  line 
is  analogous  to  the  temporary  survey  that  was  abandoned,  and 
is  a  part  of  the  legitimate  cost  of  the  completed  line.  How- 
ever, the  Commission  has  not  conceded  that  view,  and  it  is  only 
fair  to  state  many  railroads  agree  with  the  Commission. 

In  this  paper  not  all  problems  are  mentioned,  and  perhaps  not 
the  most  important.  You  may  now  be  thinking  of  problems 
which  ought  to  have  been  referred  to.  Whenever  I  try  to  write 
a  paper  or  attempt  to  make  a  speech  I  nearly  always  find  after- 
wards that  I  have  neglected  to  say  that  which  I  should  have  said 
and  often  have  said  things  that  had  better  have  been  left  un- 
said. 

I  have  said  that  the  representatives  of  the  Interstate  Com- 
merce Commission  proposed  to  incorporate  in  their  classifica- 
tions of  railway  accounts,  the  best  American  practice.  I  feel 
sure  that  is  the  case,  because  it  is  plain  to  me  that  the  Interstate 
Commerce  Commission  copied  largely  from  the  Rock  Island 
scheme  of  accounts.  I  have  no  doubt  that  each  of  the  other 
members  of  the  Committee  of  Twenty-five  who  were  privileged 
to  advise  with  the  representatives  of  the  Interstate  Commerce 
Commission  in  their  labors,  will  agree  with  me  so  far  as  the 
best  American  practice  is  concerned,  because  I  have  evidence 


24        Railway  Accounting  Under  Federal  Requirements 

that  each  one  of  them  feels  just  as  certain  as  I  do,  that  their 
own  individual  classifications  were  largely  copied  by  the  Inter- 
state Commerce  Commission.  What  a  pleasant  feeling  that 
produces  in  our  breasts,  and  you  gentlemen  would  not  have 
any  of  us  disillusioned. 

On  Tuesday  evening,  January  9th,  I  had  the  pleasure  of  list- 
ening to  an  intensely  interesting  and  instructive  talk  by  Mr.  L. 
M.  Allen,  Passenger  Traffic  Manager  of  the  Rock  Island,  on 
the  subject — "Co-operation."  Like  everything  else  which  Mr. 
Allen  undertakes,  his  address  was  a  complete  success.  His 
hearers  learned  how  easy,  and  at  the  same  time  how  important 
it  is  that  every  last  one  of  us  should  co-operate  to  boost  the  pas- 
senger traffic  of  the  Rock  Island.  Mr.  Allen  is  a  man  who  also 
exhibits  toward  the  other  departments,  the  same  co-operative 
spirit  which  he  asks  for  his  department. 

In  conclusion  I  wish  to  emphasize  the  importance  of  co-op- 
eration between  the  accounting  department  and  the  operating 
department  of  a  railroad,  in  order  to  produce  accurate  state- 
ments of  results  from  operation. 

You  men  in  the  operating  department  originate  the  records 
from  which  the  accounts  are  compiled.  On  some  railroads  a 
substantial  part  of  this  compilation  is  performed  by  clerks  in 
the  offices  of  the  operating  department  while  on  others,  the  ma- 
jority of  the  compilations  are  performed  under  the  direct  su- 
pervision of  the  accounting  department.  No  matter  which  plan 
is  used,  attention  is  called  to  the  fact  that  the  closest  co-opera- 
tion and  understanding  should  prevail.  In  short,  the  operating 
department  and  the  accounting  department  should  be  like  a 
pair  of  twins, — Siamese  twins,  for  example;  namely,  insep- 
arable. I  know  it  has  been  fashionable  for  the  accounting  offi- 
cers and  clerks  to  find  fault  with  the  operating  officers  and 
clerks  for  incomplete,  inaccurate  and  delayed  information,  and 
on  the  other  hand,  it  has  been  about  as  fashionable  for  the  op- 
erating officers  and  clerks  to  find  fault  with  the  technical  re- 
quirements of  the  accounting  department.    When  each  under- 


Railway  Accounting  Under  Federal  Requirements      25 

stands  the  other,  the  fault-finding  ceases.  We  must  realize  that 
we  are  playing  a  great  big  game;  at  an  expenditure  of  hun- 
dreds of  millions  of  dollars  the  railroad  plant  and  equipment 
are  furnished.  To  have  charge  of  the  operations  and  the 
finances  of  such  magnitude  involves  an  immense  responsibility. 
Necessarily  the  organization  by  departments  must  be  absolutely 
complete  and  more  or  less  complicated.  All  departments  must 
co-operate  or  failure  will  result.  In  a  baseball  game  each  one 
has  his  part  to  play;  the  success  depends  on  team  work.  If,  in 
order  to  thrill  the  grand  stand,  the  pitclier  erroneously  attempts 
to  play  third  base,  the  runner  is  often  safe,  perhaps  reaches 
home,  and  the  game  is  lost.  If  the  third  baseman  is  constantly 
finding  fault  with  the  catcher,  it  interferes  with  his  efificiency, 
and  when  right  field  makes  a  long  throw  home,  the  catcher 
misses  the  ball,  lets  the  man  in  safe  and  the  game  is  lost.  This 
railroad  game  is  far  more  important  than  any  baseball  game, 
but  the  same  team  work  spirit  must  be  there.  The  operating 
department  has  its  position  to  play,  the  accounting  department 
has  its  position  to  play,  and  there  are  the  other  positions  to  be 
played.  As  the  baseball  players  back  each  other  up,  so  that  in 
case  a  ball  is  missed  by  the  first  man,  the  second  one  gets  it, — 
so  the  accounting  and  operating  departments  should  back  each 
other  up,  to  the  end  that  the  game  may  be  won.  And  what  is 
the  winning  of  the  game  ?  In  baseball  it  is  not  measured  by  the 
number  of  motions  the  pitcher  makes  before  he  delivers  the 
ball,  or  the  number  of  bases  stolen,  or  the  number  of  home 
runs  and  hits  by  any  particular  man,  or  the  number  of  put  outs 
by  any  particular  man ;  it  is  measured  away  out  on  the  bulletin 
board  at  the  back  of  the  field  by  the  number  of  runs  made.  So 
the  score  of  the  railroad  game  is  measured  by  the  figures  at  the 
bottom  of  the  income  account,  which  show  the  final  balance  of 
income  left  after  all  obligations  are  provided  for.  The  railroad 
score  is  not  measured  by  the  number  of  trains  run,  not  by  the 
number  of  cars  repaired,  not  by  the  amount  of  the  pay  roll, 
not  by  the  number  of  vouchers  audited,  not  by  the  number  of 


36       Railway  Accounting  Under  Federal  Requirements 

tons  per  car,  not  by  the  number  of  statements  made ;  but  a 
combination  of  all  together,  each  one  doing  his  own  part  effi- 
ciently, always  looking  out  for  a  chance  to  assist  the  others, 
playing  the  game  every  minute, — produces  that  final  score  or 
balance  of  income,  and  the  more  co-operation  and  more  assis- 
tance each  department  of  a  railroad  renders  the  other,  the  larger 
is  the  score  represented  by  the  balance  of  income. 

Oh !  I  realize  that  I  am  not  saying  anything  new ;  you  all 
know  this  as  well  as  I,  but  we  need  to  have  these  things  re- 
peated, and  if  through  any  suggestion  I  have  been  able  to  bring 
forward  tonight  in  any  part  of  this  paper,  the  result  will  be 
that  you  and  I,  when  we  take  our  places  on  the  railroad  dia- 
mond tomorrow  morning,  will  play  the  game  with  a  little  more 
"pep"  and  with  the  co-operative  spirit  slightly  improved,  then 
this  paper  shall  not  have  been  written  in  vain. 


UNIVEESITY   OF    CALIFORNIA   LIBRARY, 
BERKELEY 


■SiS 


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'^PR  2H  1932 


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UNIVERSrTY  OF  CAUFORNIA  UBRARY 


